Nick Shaxson ■ More unfair tax treaties may be renegotiated
Published:
22 June 2016Reading time:
3 minTags:
This time it’s Uganda. From Martin Hearson:
“The government announced in its latest budget that it has finished formulating its new tax treaty policy, and will be renegotiating treaties that don’t comply. Seatini and ActionAid Uganda will no doubt chalk this up as a success.”
In Uganda, these two local NGOs have argued, apparently with good reason, that the country’s tax treaty network ‘is one of the mechanisms used by companies to avoid paying taxes, leading to illicit financial flows and tax losses for Uganda.’
Hearson also has a new working paper, co-authored with Jalia Kangave, entitled A Review of Uganda’s Tax Treaties and Recommendations for Action, whose summary states:
“Uganda’s review follows decisions by developing countries as diverse as Argentina, Mongolia, Rwanda and Zambia to cancel or renegotiate some of their historical tax treaties. These countries, together with some independent commentators, international and non-governmental organisations, have questioned whether the benefits of tax treaties for developing countries outweigh their costs.
There are two main concerns when countries sign tax treaties, Hearson notes: first, the deliberate tax cost that results from developing countries signing away important taxing rights to tax inward investment, and second, an unintended tax cost that results from certain tax treaties being used as tools in aggressive (though not necessarily illegal) tax cheating schemes. And, it seems, shovelling these tax goodies onto foreign multinationals doesn’t generally seem to have paid dividends, in terms of attracting good foreign investment. The underlying paper has more detail:
“South Africa and Rwanda have successfully renegotiated their agreements with Mauritius. Argentina and Mongolia have cancelled or renegotiated several agreements with European countries. Zambia has renegotiated its treaties with Ireland and the Netherlands, and Malawi with the latter. Perhaps in response to the international debate and the threat of further cancellations, the Netherlands and Ireland have both also begun a process of review of their tax treaties with developing countries (Irish Ministry of Finance 2014; Netherlands Ministry of Finance 2013).”
And it continues:
In Uganda, as elsewhere, tax treaties have always been surrounded by an investment promotion discourse in political debate, yet there is little convincing evidence that they have had a positive effect on investment flows into low-income countries.
In contrast, there are some clear aspects of Uganda’s treaties, such as definitions of ‘permanent establishment’ and rules concerning the taxation of capital gains, which cost Uganda significant revenue and are vulnerable to abusive tax planning. A key problem is that Uganda’s negotiating position has been based on the UN model treaty, which embodies a compromise position, rather than an ideal one to be horse-traded during negotiations.
The recent East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA) model treaties also represent compromise positions.”
That last point is important – the underlying paper provides details, which aren’t straightforward: each has strengths and weaknesses relative to the others.
Uganda’s review is intended, among other things, to put backbone into negotiators, particularly faced with countries like China which “drive a notoriously hard bargain with developing countries.” In the words of one treaty negotiator:
‘When I go to negotiate, all I have is my own judgement’, according to one negotiator. ‘We thought that cabinet should express itself’
Hearson also has some fancy graphics on his blog, which for technical reasons we can’t insert here. So we’ll leave you with this less precise but equally apt image.
The Chinese team is on the left, the Ugandan team on the right
The author
Related articles
Stolen Futures: Our new report on tax justice and the Right to Education
Stolen futures: the impacts of tax injustice on the Right to Education
31 October 2024
CERD submission: Racialised impacts of UK’s ‘second empire’
UN submission sets out racist impacts of UK’s ‘second empire’
Infographic: The extreme wealth of the superrich is making our economies insecure
Wiki: How to tax the superrich (with pictures)
Taxing extreme wealth: what countries around the world could gain from progressive wealth taxes
19 August 2024
A Call for Climate and Social Justice: Why Europe Needs a Wealth Tax
They should tax land values instead of incomes, purchases, capital gains etc. There are many big advantages in a countries progress when this regime of taxation is adopted, which should be gradually introduces as other taxation is eliminated so that Land Value Taxation (LVT) is the only source for income to the public purse.
17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics
Four Aspects for Government:
1. LVT, adds to the national income as do other taxation systems, but it replaces them.
2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all.
3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).
Six Aspects Affecting Land Owners:
5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
6. The land owner pays his LVT regardless of how his site is used. A large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
7. LVT stops speculation in land prices and the withholding of land from proper use is not worthwhile.
8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).
Three Aspects Regarding Communities:
11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.
Four Aspects About Ethics:
14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
16. The improved use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.
TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!
What happens to the playing-field at half-time? An earthquake?